Developing high‐capacity conversion‐type anodes with superior durability substituting conventional graphite anodes is urgently desired to improve the energy density of lithium‐ion batteries (LIBs). However, fatal capacity decay during cycling of the conversion‐type anodes, which is primarily due to their inevitable structural degradation and continuous solid‐electrolyte interphase reformation induced by drastic volume change, has highly restricted their commercialization. And, the interrelated effects of phase transformation, structural evolution, and electrochemical characteristics of the conversion‐type anodes during cycling remain poorly understood. Herein, the findings on the fabrication and understanding of a previously unexplored entropy‐stabilized spinel oxide, (Co0.2Mn0.2V0.2Fe0.2Zn0.2)3O4 as a promising conversion anode for LIBs, exhibiting not only moderate volume change character but also highly reversible capacities of ≈900 mAh g−1 for 500 cycles at 0.2 A g−1 and ≈500 mAh g−1 for 2000 cycles at 3 A g−1, respectively, are reported. Evidenced by in situ transmission electron microscopy coupled with theoretical calculations, its underlying mechanism underpinning highly reversible Li storage is explicitly revealed, which originates from reversible phase transformation and domain reconstruction during cycling. Moreover, the origin of small volume change is also clearly clarified. This work provides renewed mechanistic insights into designing high‐capacity and durable conversion‐type electrode materials for high‐performance LIBs. In this work, a new entropy‐stabilized spinel oxide, (Co0.2Mn0.2V0.2Fe0.2Zn0.2)3O4, is identified as a promising conversion anode for Li‐ion batteries, exhibiting moderate volume change character, highly reversible capacities and stable cycling performance. Its underlying mechanism underpinning highly reversible Li storage is explicitly clarified through in situ transmission electron microscopy coupled with theoretical calculation analysis.